Iran’s Economic Crisis and the Impact on its Strategy

Following the recent reimposition of US sanctions on Tehran, Prof. Giancarlo Elia Valori examines the current state of Iran’s economy as well as its future military and foreign policies

An exchange shop in downtown Tehran, Iran (Photo: AP)

Let us analyze Iran’s current demographics, which – as happens everywhere – is at the basis of the labor force complexion and of the public investment volume, as well as productivity and private spending.

During the first years of the Islamic revolution, soon after the advent of the regime, there was a 2.5 million increase in births. In the 2000s, the annual increase of newborns was only one million approximately, while currently there is a phase of further reduction in births.

There is also migration – another decisive factor in demographics – which, as already noted, is always at the basis of every country’s economic structure.

According to the 2016 population survey, the latest effective one carried out by the Ayatollah regime, as many as 1.8 million Iranians – i.e., 2.2% of the current 82.407 million people – are of foreign origin.

Hence the presence of a wide share of young or very young people.

As can be easily inferred, this leads to a high rate of unemployment and youth unemployment, in particular.

As often happened in the past, there is also the regimes’ tendency to push the excess of working age population out of the country, also by means of war.

Considering the official data of September-October 2018, in the Shi’ite Islamic Republic of Iran, the average unemployment rate is 12.2%.

According to the latest data, however, women’s unemployment rate is already equal to 19.8%, while the unofficial statistics of real unemployment among young people alone was 28.40% in the first quarter of 2018, with regional peaks of 35% and even 38% in some peripheral areas.

Another secondary, but inevitable effect of youth unemployment is the brain drain, as a result of which every year 150,000-180,000 graduates leave Iran.

A hidden tax that deprives Iran of 50 billion tax revenue, in addition to the loss of public (and family) costs for higher education.

Nevertheless, after 2015 – the year of the JCPOA with P5+1, i.e., China, France, the Russian Federation, Great Britain and the United States, as well as Germany’s participation – there was a significant economic growth that, however, did not facilitate Iran’s access to Iranian capital and assets which had been frozen due to sanctions.

Iran’s total frozen assets are still between 100 and 124 billion US dollars, with approximately 50 billion dollars which have recently been refrozen in the United States alone.

Hence the sanction phase has been characterized by a real collapse of the Iranian economy.

From a GDP growing by a yearly 6% in 2010, in 2015 – exactly the year in which the JCPOA was signed – Iran certified a mere 1.5% GDP increase.

In 2016, as a result of the lifting of some sanctions against it, the GDP grew by 12.5% and by over 4% in 2017.

Hence a record growth in 2016 – due to the JCPOA – but later considerable growth rates were still recorded, certainly higher than the miserable growth rates of the European GDP in those same years.

Before the US unilateral withdrawal from the nuclear deal with Iran, international banks had also predicted a 4.8% increase in Iranian GDP in 2018.

The current rate is instead 1.8%. 

Sanctions, especially those regarding currency, always reach the target.

Currently, however, the US unilateral sanctions do not excessively affect Iran’s military system, which is mainly based on domestic technologies and patents and does not fear to be significantly damaged by the embargo and sanctions against it.

Nevertheless, since the announcement of the US withdrawal from the nuclear deal last July, the value of the Iranian currency has halved. So far, the riyal has even lost 80% of its value as against the dollar.

Moreover, due to some natural disasters, Iran is currently forced to import much food from abroad, just now that its currency is worth ever less.

Moreover, as always happens, the great devaluation has led to high inflation: currently, the Iranian inflation rate is realistically about 24%, while the Iranian government reports a 10.2% rate.

Iran has still approximately 90 billion US dollars of reserves, with the extraction of 3.79 million barrels/day (as of June 2018), but production will certainly decrease, considering the new partial sanctions imposed by the USA.

To the delight of Saudi Arabia, above all, whose crude oil production has a direct inverse correlation with Iran’s.

At strategic and military levels, if Iran wants to organize a war action, its first step will be the Strait of Hormuz.

Over 30% of the maritime oil traffic transits through this waterway (i.e., 18.5 million barrels/day), considering that it is the most used route by all the Arab exporting countries.

Nevertheless, the Strait of Hormuz which, at its narrowest, has a width of 33 miles, is also the waterway used for most Iranian oil exports. This significantly limits the possibility of a generalized block of the Strait of Hormuz, not to mention the fact that the headquarters of the US Fifth Fleet is at a short distance from Manama, the capital of Bahrain.

Obviously, the only relatively credible threat of blocking the Strait of Hormuz is enough to make the oil barrel price rise significantly – and therefore this is what really matters.

Hence, there is a direct link between the pursuit of the Iranian natural strategic goals and the increasingly difficult situation in Iran, subject to new and certainly not negligible unilateral US sanctions.

The more Iran wants, the more it will be punished on the markets and in the international geopolitical system.

Both the current US sanctions of last November and those imposed before the JCPOA, regard precious metals, the acquisition of US banknotes, or of technologies directly or indirectly linked to oil extraction or weapon manufacturing, as well as to the operations of oil transport and storage.

Obviously, all payments to Iranian institutions or individuals cannot be made through US banks. Hence, while a direct confrontation between Iran and the United States is currently unlikely, the tension between the two countries is still conceivable – an escalation that also implies, at certain stages, war or semi-war operations.

A further variable of this scenario is Iran’s use of indirect or "hybrid war" strategies in the areas near Hormuz, or in any Middle East region where Shi’ites or the Iranian Armed Forces – above all, the Pasdaran – can start a war of attrition with the typical methods of hybrid war, guerrilla warfare, proxy war or strategic friction.

In particular, the ships of the Arab countries which are Iran’s "enemies" will be attacked by Iran in various ways, even without the possibility of identifying the attackers.

It is a highly likely scenario, but only if the Shi’ite republic feels to be encircled or under attack by Israel, the USA or the Middle East Sunni powers.

In fact, the Yemeni Houthi rebels have already attacked Saudi Aramco ships, during their crossing of Bab el-Mandeb Strait. If Saudi Arabia responded in the same way, this would give rise to a "small war" in the Strait, which is precisely what Iran wants, without ever directly creating the opportunity.

Approximately 5 million barrels/day transit through Bab el-Mandeb Strait to the Mediterranean, and the other way round.

Hitting these routes, without direct actions by the Guardians of the Revolution or by the less trusted Artesh, could be a possible option for Iran.

In so doing, however, Iran would antagonize Europe which, indeed, count for nothing strategically and militarily – but this could set a precedent for a US military action, with or without its regional allies.

Hence, if we put in place a series of international financial, political and military pressures, we can think that – in the future – the USA can sit back to the negotiating table with Iran.

Currently, it seems that the United States is leaving the Iranian affair to Saudi Arabia and Israel – but probably it will not be enough.

Hence, according to the basic ideas of Iran’s current leadership in power, the negative reaction to the growth of Iran’s power does not depend on its threatening nature, but on the fear for the growth of a new Middle East actor, namely Iran.

Therefore, again according to the Iranian ruling class, only by pursuing the goals of Iran’s great autonomy and of an evident and significant power projection, will it be possible – in the future – to have an acceptable level of security for Iran and a good level of geoeconomic stability.

The Iranian leaders’ strategic-military theory, however, places both conventional and unconventional threats on an equal footing.

Nevertheless, according to Iran’s leadership, Iran's expansion is related to the mere security and stability of the country and has no expansionist aims.

This is what Iran’s leaders maintain. But how can peaceful expansion of commercial networks and routes be pursued if Iran has to move between potential or overt enemies?

Hence, as the Iranian leaders maintain, if their economy is further put in crisis, the Iranian government will start bilateral or trilateral negotiations with its neighboring countries, thus creating transport, financial and commercial networks, besides the stable exchange of labor force, national currencies, goods, and services.

The Iranian leaders think that, in this vast region, their country could arrange its new economic development, outside the framework of relations with the USA and, possibly, with the weak EU.

In other and even much clearer words: railways, roads, trade and IT networks between Iran and Lebanon, Iraq and Syria.

This is one of the implications of the decisive role played by Iran in the Syrian war.

In terms of national defense, the Iranian Shi’ite leaders believe that the most important course of action in this sector is the establishment of excellent relations with the United Arab Emirates and Qatar, while a Saudi-Turkish axis is also emerging in the Iranian decision-makers’ minds.

A new Turkish-Iranian axis organized by the Russian Federation, leading to peace between Iran and Turkey – peace that regards Syria which, however, in the Turkish leaders’ view, could lead to a financial and oil alliance between the two countries, an alliance to which Russia would not be alien.

Furthermore, according to the Iranian leaders, the fight against ISIS was an operation to make Iran’s borders safe, especially with the Pasdaran’s interventions in Syria and Iraq.

The other strategic project pursued by the Iranian leaders is a stable and strong alliance with the Russian Federation.

From Iran's viewpoint, all its recent military operations – even using the new scenario created by the "Arab springs" – have exploited the chaos spread by ISIS, for example in Iraq, with a view to creating a stable corridor between the Iranian territory and some Iraqi areas, exactly as it is happening in Syria in the new green line between Iran and Hezbollah’s Lebanon.

Geopolitics of "corridors," which are at first military and then economic corridors.

Assad is therefore crucial for all Iranian projects since he can link Iran with the Mediterranean.

With possible threats, especially asymmetric ones, by Iran, which could be launched from the Lebanese coast not only against the "traditional" opponents (Israel and the USA, of course), but also against the whole transit of goods to the Southern coasts of the EU which, obviously, has not yet realized it.

There will be Iranian naval bases on the Lebanese coast in the future.

Hence, within all this conceptual mechanism, we can see Iran’s current and future choices in the fields of military and foreign policy:

1) An increase of commercial ties with the countries bordering on the Shi’ite republic, through agreements including monetary, export, labor and financial support arrangements to leave the dollar area, as China and Russia do;

2) Use of these relations for creating an "external circle" useful for Iran’s defense, with obvious needs to use remote positions for missiles and for anti-aircraft artillery, with the future establishment of a sort of "Shi’ite NATO," which could be linked to the Shanghai Cooperation Organization (SCO);

3) Creation of a balance between the loss of Iranian positions in the US market and the opening up of new opportunities in the European and Middle East markets, with the Iranian economic expansion to Azerbaijan and Uzbekistan;

4) Future expansion of proxy wars in Yemen and, possibly, also in Saudi Arabia, possibly with an Iranian "seduction" operation vis-à-vis Manama and other Gulf Emirates, obviously in addition to further strengthening the link between Iran and Qatar;

5) Probable direct threat to Israel, through Hezbollah, so as to verify the Israeli relations with European countries and the USA. The basic question of Iranian leaders is always the same: will Europeans, or even Americans, be willing to "die for Jerusalem"?

6) Planned mounting of tension in Bab el-Mandeb Strait, but with short demonstrative actions, of which Iran itself will be the first to observe their impact on the oil market and on the military structure of the Middle East;

7) Iran’s probable future creation of a sort of "Shi’ite common market", but also open to other Sunni countries, which – however – will go along Khomeini’s traditional policy line: to expand the "revolutionary" Iran in the Central Asian axis, by unifying many countries having Shia minorities, such as Uzbekistan, the Hazaras in Afghanistan, Azerbaijan, and the Shia minorities in Pakistan, to which Iran could ensure social peace. A possible future strategy for Iran will be strengthening Shi’ite minorities so as to later deal with their Sunni governments.

Many signals will be sent to us by Iran in the coming months and years.